Legislation Weakens Pension Protections
Bill Designed to Bolster Underfunded Plans Creates New Ways for Employers to Cut Benefits
By THEO FRANCIS and ELLEN E. SCHULTZ
Staff Reporters of THE WALL STREET JOURNAL
January 18, 2006; Page D1
Pending federal legislation aimed at pushing companies to shore up underfunded pension plans also eliminates some longstanding retirement protections and gives employers new powers to reduce some workers' pensions. Both the House and Senate have passed versions of the legislation, and within the next month lawmakers are expected to begin the work of reconciling the two. No one knows for sure how the final bill will look, but congressional leaders have said they hope to send it to President Bush by early March.
For the most part, lawmakers and lobbyists have focused publicly on how the legislation, under debate for more than two years, is intended to toughen employer obligations to contribute money to pension plans. Among other things, it requires employers with underfunded plans to pay higher premiums to the Pension Benefit Guaranty Corp., a government-run insurer of private pension plans.
But several little-noticed provisions appear to let employers bolster their pension plans at the expense of employees. For example, measures in both the House and Senate versions would force employers whose plans become underfunded to freeze pensions and, in the House version, even revoke benefits in some situations. Other measures would allow employers to significantly reduce the size of pensions they pay to many departing and retiring workers. Companies also would gain greater ability to transfer more money from pension funds to pay for other retiree benefits. One of the most far-reaching changes in both the House and Senate versions would reduce the payment workers receive from their pension plans when they take single, lump-sum payments in lieu of monthly distributions. The payment reduction would result from changing the interest rate used to calculate the size of lump-sum distributions.
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The legislation was sparked by rising concerns about the eroding health of so-called defined-benefit pension plans, which promise workers retirement benefits based on their pay and years on the job. Though robust through the 1990s, many pension plans became underfunded in recent years after declining interest rates boosted their liabilities and several years of poor stock market returns reduced their assets. Nationally, pension plans are underfunded, meaning they don't have enough money to pay all the projected benefits of the participants, by an estimated $450 billion.
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Among the most significant legal changes in the proposed legislation are rules in the House version that would allow poorly funded plans to take away certain pension benefits that older employees have already earned. This would reduce the plan's payment obligations, and thus render it better funded... The change, if adopted, would reverse a key protection under federal pension law, which forbids employers from rescinding a benefit that has already been earned. But pension advocates worry that modifying a core protection in the law would establish a dangerous precedent that would soon be extended to the majority of pensions, so-called single-employer plans.
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Write to Theo Francis at theo.francis@wsj.com and Ellen E. Schultz at ellen.schultz@wsj.com
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